Ten Lessons for the Rest of the Trade War

The 2 weeks since Liberation Day have felt like years. What, if anything, have we learned?

1. Neither China nor the United States knows how to back down, and neither intends to.

• Trump’s Liberation Day tariffs are a coin with a public head and a private tail. While domestic analysts have made much of the tariffs’ publicized purpose (saving American manufacturing¹), we might instead move to interrogate Liberation Day as a negotiation tool. Insofar as Trump believes that America is being given a raw deal, he is willing to use the massive force of tariffs to extract concessions that would never be considered in economic peacetime. I argue that this is a miscalculation. Read on to find out why.

• When threatened, Beijing’s standard operating procedure is to negotiate a way back to détente and bide its time.² For instance, Trump’s Phase One Trade Deal was put into ink in 2020, but China pulled away at the first opportunity, leaving two hundred billion in imports on the table.³ That’s the playbook. Accede in public, dissent in private, return to the initial status quo. However, Beijing’s response to the Liberation Day tariff has been uncharacteristically harsh and brittle. This is a break with their established strategy.⁴ While it's impossible to know what Xi Jinping is thinking, we can speculate that he has probably grown tired of negotiations legitimized by the threat of tariffs. By my approximation, China has begun to suffer from If You Give a Mouse a Cookie Syndrome. Since they have no clear way of knowing when the litany of concessions would end, they’ve chosen instead to take a hit in hopes of being the last man standing. Make no mistake: they would not be willing to fight this trade war if they did not believe they could survive.

• That all means that the pre-Liberation Day status quo is beyond reach. We are holding each other’s heads under the water. The Second U.S.-China Trade War will be a test of sheer will: who can hold their breath the longest?

2. Lines of communication with China are breaking down.

• To understand how, we must look not at the state, but near the state. Chinese state-adjacent social media encompasses sources like family members of major city chiefs. These sources,⁵ which represent the views of the state with an added veneer of plausible deniability, have begun to refer to the trade war as “a war without gunsmoke.” As such, recent diplomatic gains with the Chinese state are expected to be rolled back. In some areas, we may regress to a point roughly commensurate with our position multiple decades ago.

• Under Biden, China pledged to target the laboratories that supply fentanyl precursors to the global black market. (If the flow of fentanyl precursors is disrupted, keep an eye on Afghanistan’s⁶ opium poppy fields.) This gesture was mostly symbolic, and its rollback represents China’s return to an unrepentant position on the American opioid crisis. Don’t Orientalize this move, though: China’s role is structural, not malevolent. The Chinese state’s culpability in the matter of fentanyl precursors is hotly contested, and this decision is not an admission of deliberate state complicity⁷ in the fentanyl trade, which remains contested in both policy and intelligence communities.

• This has been a long time coming⁸, but no one expected it to get this bad this fast. With critical food exports being canceled on both sides and state agreements erased, U.S.-China diplomatic drift will only worsen. Lethal miscalculations become orders of magnitude more likely. Indeed, if we are not careful, the consequences of diplomatic drift may become brutally apparent during the next set of military drills in Taiwanese airspace.⁹

3. Don’t expect to visit the Great Wall any time soon.

• China’s immigration-level responses to the trade war have ranged from the rational to the ridiculous. The state initially issued reasonable warnings¹⁰ to Chinese students studying in America, cautioning them about the rapidly shifting situation. The announcements escalated to an absurd conspiracy theory¹¹ alleging that NSA agents embedded at the University of California and Virginia Tech had perpetuated a major cyberattack at the Asian Winter Games. The American embassy in China has not yet dignified that with a response.

• For our part, Chinese students have been scheduled for deportation (from, oddly enough, the University of California¹²), and other sanctions are expected to be placed on Chinese international students by the end of the week. They may even resemble our earlier expulsions¹³ during the prior trade war.

• For American citizens in China and Chinese citizens in America, touring, studying, and doing business is rapidly becoming inadvisable.

4. ASEAN (as we know it) will cease to exist.

• ASEAN is the Association of Southeast Asian Nations; the United States and China are its two largest trading partners.¹⁴ 80.8 percent of its exports are goods.¹⁵ ASEAN is designed as a neoliberal compromise, balancing free trade agreements with outmoded Cold War narratives about Asian alliances against China. In reality, that gave ASEAN the ability to walk the tightrope,¹⁶ playing host to American naval drills while deepening ties with the Chinese economy. ASEAN’s highwire act will now come crashing to an unsightly end.

• As of Liberation Day, every single ASEAN country has been slapped with brutal tariffs: Cambodia with 49 percent, Laos 48 percent, Vietnam 46 percent, Thailand 36 percent, Indonesia 32 percent, Malaysia 24 percent, Brunei 24 percent, Philippines 17 percent, and Singapore 10 percent.¹⁷ Trump torched substantial goodwill among ASEAN’s leaders by claiming that the baseline 10% tariffs were reciprocal. The further tariffs were a deeper insult: much has been written¹⁸ about the flawed and dishonest Liberation Day tariff rates, and that is an entirely different Substack post altogether. Just know this: ASEAN is rightfully unhappy about a frankly protectionist trade policy, aimed at unseating the textile industries that keep their countries in the black. Meanwhile, Trump’s negotiation demands for ASEAN include a reduction in their interactions with China,¹⁹ the only option they have to account for the damage that protectionism will cause. The consequence is that they will have to choose one player to align with, and only one.

• Because ASEAN is currently pursuing a Singapore-led model of export-oriented industrialization²⁰, its main goal now is to align with whatever power can offer them the most cash.²¹ What’s the likely outcome? In an us-versus-them battle of wills, ASEAN will probably choose China and its Regional Comprehensive Economic Partnership. No surprise, then, that Xi Jinping was warmly received in Malaysia yesterday, to the tune of a six billion dollar digital infrastructure deal.²² The shift to China may already be irrevocable.

5. South Asia’s economy will survive, though it will not thrive.

• South Asia has much more latitude to respond. Divide it into two blocs: those who are playing it cool, and those who aren’t.

• The chillers include Afghanistan, Bhutan, the Maldives, and Nepal, which received only the minimum 10 percent tariff. (Particularly keep an eye on Afghanistan. Despite the Taliban’s violation of the Doha Agreement,²³ our government continues to give them wiggle room to do more or less whatever they want. The reasoning for this realpolitik normalization of the Taliban eludes me.) And then there’s India. After being hit with a 26 percent tariff, India lowered some of their tariffs and pledged to import more U.S. goods.²⁴ The United States’ $45.7 billion trade deficit with India doesn’t explain their willingness to fall in line so much as the fact that New Delhi and Washington were already at the negotiating table.²⁵ Expect to see a formalized bilateral deal soon to reduce tariffs and nontariff barriers. The U.S. may also deepen public or covert collaboration with the Indian Armed Forces, though the details of that remain to be (un-)seen.

• The other players in the region are not so easygoing about the recent tariffs. They also received the harshest sentences in South Asia: Sri Lanka was slapped with 44 percent, Bangladesh with 37 percent, and Pakistan with 29 percent. Like the targeted ASEAN nations above, Bangladesh²⁶ and Pakistan²⁷ are currently struggling to walk the tightrope. They also both primarily export textiles and other goods. The next few years will not be easy for them. In a worst-case scenario, the U.S. loses Bangladesh and Pakistan altogether, calling into question the entire South Asian map.

6. Arab Gulf countries will not pick a side.

• The Arab Gulf has been courting both sides for a very long time. Gulf countries now play host to new Chinese military outposts²⁸ and Belt and Road infrastructure from the UAE to Oman. All the while, those same countries are normalizing Rubio’s hawkish ‘maximum pressure’ campaign²⁹ against Iran. They are strategically impenetrable. The Gulf is less ‘enigmatic genius’ and more ‘relentless double-dealer with a good poker face.’

• The primary stumbling block that’s forcing the Gulf not to accede to Trump’s desires is, ironically, his tariffs. As a nation, the UAE’s margins are razor-thin. Abu Dhabi’s “Axis of Secessionists” is bathing Central Africa in blood³⁰; Netanyahu’s patience with it is shrinking. In Israel and beyond, Qatargate³¹ calls into question the long-term sustainability of Tamim bin Hamad Al Thani’s rule. And who could forget about Saudi Arabia, where MBS is struggling to pretend to care about Neom³², struggling to keep a lid on the consequences of the kefala system³³, and indeed struggling to maintain legitimacy at large. A sustained drop in oil prices could be catastrophic for the Saudi political order. Extreme fear is the current driver of Arab Gulf politics.

• In summary, the Gulf does not have room to choose between China and America. Like the current F1 race in Bahrain,³⁴ one wrong move in either direction could spell total disaster. The Gulf, then, will remain on the tightrope for as long as it can.³⁵

7. Artificial Intelligence, Hollywood, and Renewables will enter long-term freefall, but there may be no ground.

• Chögyam Trungpa, a Tibetan Buddhist spiritual leader, once wrote: “The bad news is you’re falling through the air, nothing to hang on to, no parachute. The good news is, there’s no ground.”  This is especially pertinent in the realm of AI, where historic developments sometimes take shape in a matter of days or weeks. The reality here is that AI collaboration with Beijing never amounted to much of anything. When we did engage them on AI development, we did so destructively³⁶ rather than collaboratively. Though tariffs are currently impeding our access to cutting-edge AI-capable chips³⁷, negotiations with Taiwan might restore access to them sooner than we expect. The opportunity cost of tariffs on AI-capable goods is impossible to assess, since their development is inherently unpredictable: there is no ground. Being locked out of Chinese innovations is not a real concern either, as they’ve always kept new cards very close to the vest; cooperative summits³⁸ were primarily gestures of shared restraint. In either case, we have no way of knowing what we are (or aren’t) missing out on.

• Word on the street is that renewables are the future. The real debate is now the speed at which they are rolled out, and how much state interaction in that rollout is advisable. There’s similarly no room left for debate when it comes to what nation is winning the race as of today, and it isn’t us.³⁹ Trump seeks to isolate America to develop an energy industry that is devoid of Chinese dollars and far-removed from Chinese companies. The problem with renewable protectionism⁴⁰ is that complacency will develop in the market. Consider Japan. Government-protected, insular telecom firms became exporters of technological development, just as intended. These firms were protected by tariffs, inward-facing, and favorites of the state without being state-run. It worked for about half a decade. When Tokyo’s insularity meant that they missed the boat on Silicon Valley innovation, the policy revealed its long-term consequences. We should be trusting the market to identify the strongest player in green energy. Keeping our industry cloistered will leave us in the junkyard.

• Supposedly, Beijing is done⁴¹ importing American films. This is a bluff, and I don’t buy it. The Chinese box office is in turmoil.⁴² In turn, major Hollywood studios have become increasingly reliant on the much-maligned “China market,” which is, for the most part, the same as the American market. I’m aware I’m working against the common consensus here, but stick with me for a minute. The average moviegoer buys a ticket because of positive word of mouth, because a major star they recognize is on the poster, or because they want to see what becomes of the heroes in the explosive new installment of their favorite franchise. This is true of both China and the West.⁴³ And while much has been made of the success of Ne Zha II⁴⁴, it’s not quite evidence that China is ready to do without American films. It’s sort of like Top Gun: Maverick. A thrilling epic drawing on our sacred national mythology is not going to fly (pun intended) in China. Especially not with the Taiwanese flag⁴⁵ in it. Likewise, Ne Zha II’s Chinese nationalism will necessarily leave American audiences cold. Here’s the outcome: the Chinese theater industry is on thin ice⁴⁶, and it can’t survive without our cultural exports. Don’t worry about Hollywood. There are bigger things to focus on.

8. Economic decoupling is shifting from an impossibility to a reality.

• Yes, really.⁴⁷ Mind the gap, as it will be almost eight trillion dollars wide.⁴⁸

9. The prepared will inherit the Earth.

• Apple and Amazon are going to have it fairly easy. Why? They prepared.⁴⁹ These firms have developed two keys that open the same door. Both rely on a willingness to throw capital behind policies that violate core tenets of market efficiency.

• The first key is stockpiling, which they’ve been doing. They saw a ten percent jump in shipped phones last year⁵⁰, with a particular emphasis on October, November, and December. Note that in this context, shipped does not necessarily mean sold. We have no way of knowing what percent of shipped units went on sale, but we know from interviews with executives that Apple has a substantial stockpile of units in reserve. Amazon has been pursuing the same strategy, canceling contracts with Chinese sellers and suppliers⁵¹ while insulating its supply chains with the development of product reserves.

• The second option is direct negotiation. If stockpiling is the key that unlatches the deadbolt, this is what opens the door. Apple and Amazon, among other major players, contributed symbolic good-faith donations to Trump’s inauguration.⁵² Musk’s continued presence in the White House is an inarguable confirmation of Trump’s willingness to court Big Tech, even in the realm of billion-dollar handshake deals.⁵³ Perhaps that’s why Apple was able to covertly ‘airlift’ an extra 1.5 million iPhones out of India without being subject to tariffs.⁵⁴ Time will tell. It is difficult, however, to imagine a tech industry that does not leverage quiet administrative deals to keep its head above water.

10. You are not allowed to complain.

• Both China and the United States have engaged in dissent-silencing over the tariffs, up to the highest level of government.

• Xi Jinping has a zero-tolerance policy⁵⁵ for complainers. His “no whiners allowed” provision has been extended from its usual scale of domestic enterprises to America,⁵⁶ as well. Echoing Leninist political discipline, it is difficult to imagine a world in which China allows much latitude for discourse on the trade war.

• Interestingly, one of the world’s most talented manufacturing strategists has been asked not to comment on the Liberation Day tariffs. Elon Musk’s ideal world⁵⁷ involves 0% tariffs on most countries and a negotiation-based strategy, which has rapidly made him a pariah in economic discussions at the White House. Notable conservative economists like Thomas Sowell are joining him in condemnation⁵⁸ of the tariffs. The longer this split continues, the more likely it is to grow into another thorny point of contention between Trump’s administration and classical conservatism. It would neither be the first time nor the last.

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